The PM-Vidyalaxmi scheme is a groundbreaking initiative aimed at removing financial barriers for meritorious students pursuing higher education in top-ranked institutions across India. It was introduced in the Finance Minister’s Budget speech for FY 24-25. Following extensive consultations with the Department of Financial Services and heads of major banks, the decision to implement this initiative was unanimous, signalling a united commitment from financial institutions to enhance higher education accessibility nationwide.

The scheme’s purpose is clear: ensure that no deserving student is deprived of higher and technical education due to financial constraints. In the broader landscape of bank lending, education loans have emerged relatively recently. The RBI had been conservative regarding loans for “non-productive purposes,” and both home and education loans were off-limits for commercial banks till the reforms of 1991.

The shift towards prioritising education loans began with the Budget for 2001-02, when the government recognised the importance of broadening access to higher education. This acknowledgement led to an interest subsidy for student-borrowers with an annual income below ₹4.5 lakh, though the collateral-free limit was only ₹4 lakh then.

Key features

The introduction of the PM-VS, with an outlay of ₹3,600 crore, is a major leap forward — it makes higher education a widely accessible “public good” with the following key features:

Interest subvention: A 3 per cent interest subvention on loans up to ₹10 lakh during the moratorium period, applicable to students with an annual family income of up to ₹8 lakh. This provision aims to benefit around 1 lakh students each year.

Guarantee coverage: For loans up to ₹7.5 lakh, the scheme offers a 75 per cent guarantee coverage for banks, reducing the risk associated with education lending and encouraging banks to extend these loans.

Digital disbursement: Loans for courses in institutions listed under the National Institutional Ranking Framework (NIRF) will be collateral-free and disbursed through the Vidyalakshmi Portal, ensuring a seamless digital process.

Targeting meritorious students enrolled in approximately 860 top institutions, as per the NIRF ranking, PM-VS covers nearly all reputed educational institutions across States. There is an emphasis on supporting technical courses, aligning with the nation’s goal of developing a skilled workforce ready to meet industry demands.

Since the inception of education loans in India, statistics indicate that 10-15 per cent of enrolled students have taken advantage of these loans, with the urban poor benefiting more than rural populations. Gender data show that 35 per cent of borrowers have been female, although the urban bias in access and awareness remains evident.

The positive impact of increased government support for education is evident in past experiences and should be further developed. Current educational loan exposure in the banking sector stands at approximately ₹1.20 lakh crore as of June 2024. In the post-Covid period, this segment has grown nearly 18 per cent annually. Despite education loans comprising a modest 2.6 per cent of total personal loans, they have not posed a macroeconomic stability risk, with the RBI Financial Stability Report of June 2024 noting a NPA ratio of 3.6 per cent in this category. Given India’s trend-line GDP growth of 7-8 per cent, the risks associated with education loans are expected to remain contained.

The New Education Policy places significant emphasis on aligning educational outcomes with industry needs, addressing both the demand for skilled labour and the value-added potential in the economy. To optimise PM-VS, it may be beneficial to create targeted mechanisms that identify labour demands in the economy — especially in technical sectors — and set course-specific loan limits. By linking educational financing to specific skill needs in the economy, India could foster a workforce with better employability prospects — paving the way for a more inclusive, skilled, and empowered India.

The writer is a commentator on banking and finance